Inflation Dynamics and Subjective Expectations in the United States
AbstractWe estimate a forward looking New Keynesian Phillips Curve (NKPC) for the U.S. using data from the Survey of Professional Forecasters as proxy for expected inflation. We find that the NKPC captures inflation dynamics well, independent from whether output or unit labor costs are used as a measure of marginal costs. We show that identification of expectations exploiting orthogonality to output is severely distorted and explains why the NKPC estimated with survey data performs much better than under rational expectations. We also find that lagged inflation enters the price equation significantly suggesting that there is a role for lagged inflation beyond that of capturing non-rationalities in expectations. Estimating the NKPC of Christiano et al. (2001) where lagged inflation enters due to price indexation by non-reoptimizing firms, we find that it captures the role of lagged inflation reasonably well.
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Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 78.
Date of creation: 01 Mar 2002
Date of revision: 02 Jun 2009
Publication status: Published in Economic Inquiry, 2011, Vol. 49, 1, pp.13–25.
Inflation; Phillips curve; Subjective Expectations;
Other versions of this item:
- Klaus Adam & Mario Padula, 2011. "Inflation Dynamics And Subjective Expectations In The United States," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 13-25, 01.
- Adam, Klaus & Padula, Mario, 2003. "Inflation dynamics and subjective expectations in the United States," Working Paper Series 0222, European Central Bank.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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